Understanding Self-Employment Taxes

For those who earn self-employment income--either as freelancers or through owning a business--tax time can be especially painful. Self-employment taxes seem like a double hit. You pay your income taxes and then you pay self-employment taxes too. Why? What are self-employment taxes?

Get the answers to these questions and more about self-employment tax, including how much it is, who has to pay it, and how to pay it.

What Are Self-Employment Taxes?

Schedule C tax form used for self-employment taxes paperclipped to a dime

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The self-employment tax is what is commonly known for employees as "payroll taxes" or FICA. These Social Security and Medicare taxes, which are different from (and in addition to) income taxes. Self-employment taxes total 15.3% (12.4% for Social Security and 2.9% for Medicare) for the first $118,500 (for 2016) of self-employment income. This wage base can change yearly, but the percentages usually stay the same.

This sounds steep, but it is no more than is collected for these same payroll taxes from employees of a company. The difference is that in an employment situation employees and employers split these taxes, each paying 7.65%. When you are self-employed, you pay both the employer and employee parts.

Who Must Pay Self-Employment Taxes?

Anyone (excluding certain church employees) with self-employment income of at least $400 are required to pay self-employment taxes. However, unless you make at least $600 the company that paid you the income is not required to send you a 1099-Misc statement that states your self-employment income. Self-employment income is earnings that you gained through a home business or through consulting. If you receive a W-2 for the income from the company then it is not self-employment income. 

How Do I File Self-Employment Taxes?

Self-employment taxes are paid when you pay your income taxes. The amount is entered on line 56 of your 1040. However, this amount is calculated on a separate form, the Schedule SE. If you are filing a Schedule SE, you will also be filing a Schedule C (used to calculate profit or loss from a business or sole proprietorship), Schedule F (used by farmers) or Schedule K-1 Form 1065 (used for partnerships and joint ventures).

How Can I Reduce My Self-Employment Taxes?

How much you pay in self-employment taxes is based on your net business income, so the only way to reduce your self-employment taxes is to reduce your net income.

The best way to do that is to be sure you are taking all the self-employment deductions you are allowed on your Schedule C (or other business income tax schedule) as this will reduce your net business income. Deductions on Schedule A or IRA contributions do not reduce your net business income and will not reduce your self-employment taxes.

Can I Deduct My Self-Employment Taxes?

You can deduct half your self-employment tax when figuring your gross adjusted income. This will reduce the amount of income tax you pay. The reason you can only deduct half is that you are only entitled to deduct half of the FICA taxes that you pay as an employer, just as any other employer would, not the employee half.